That volatility would seem like a slam dunk for Team Krugman—except for one thing: the banks of that era did, in fact, face onerous government regulations that weakened the safety and soundness of the financial system. Krugman has picked an example that undermines his case; the Nobel laureate in economics and celebrated commentator has misread U.S. banking history.

As Steven Horwitz notes at Coordination Problem, banks were not allowed to operate branches across state lines, and this prohibition of interstate banking hindered their ability to diversify their portfolios and made them prone to panics. Moreover, federally chartered banks were required to back their currency with government bonds; this regulation made it too costly for them to respond to increases in the demand for money by issuing more bank notes, which in turn led to currency shortages and financial crises, such as the disastrous Panic of 1907.

Horwitz continues:

But Krugman has a much bigger puzzle to explain away: if free markets in banking are the problem, why did Canada, which, during this period, had a far less regulated banking system than the US, not experience the panics we did, and why did no Canadian banks fail during the Great Depression while around 9000 US banks did? If Krugman’s criticism of the “mythology” is correct, the Canadian banking system of that era should have been a basket case, but instead it was a model for the world precisely because it lacked the two most damaging government regulations present in the US. Canadian banks have always been free to operate nationwide and were, before 1934, able to issue their own currency free of bond collateral requirements. The very free market in Canadian banking dramatically out-performed the much more regulated US system.

So Professor Krugman, what say you? If the reason banks fail is because free markets in banking don’t work, how do you explain the lack of the problems you claim plague free markets in the much less regulated pre-1934 Canadian banking industry? The mythology, Professor, is your history, not mine.

Well said.

During the major last budget crisis many suggested repealing this cap as a solution. “I don’t know how we can talk about reforming the California budget without reforming Prop. 13,” said San Francisco Assessor Phil Ting, who advocated raising rates on commercial properties.

According to the U.S. Census Bureau, as of 2005, California ranked 45th nationwide in property tax rates as a percentage of real estate value. But in terms of per capita income, Californians rated 17th, paying the state an average of 3.17% of their income for the privilege of living in their own homes. Since housing prices were grossly inflated over the last few years—and this author thinks they still are—millions of middle-class Americans with new homes forked over quite a bit. Many landlords barely break even, once they pay tribute for the continued right to own their own property.

States without a cap on property assessments have suffered skyrocketing taxes with the housing boom. Rates have gone up 100% in some Florida markets. Along Lake Tahoe in Nevada, property taxes went up 135% in a peroid four years. For those on fixed incomes or retirees with little more than their home to their name, Proposition 13 has been a lifesaver in today’s volatile housing market.

Despite Prop 13, Sacramento’s property tax revenue ballooned during the housing bubble—increasing 22.11% from 2000 to 2005, about the same rate that general per capita revenue increased over the same time, even as per capita income only increased 13.8%, according to the Center for Governmental Analysis. Indeed, property tax revenue rose 30 years in a row after Prop 13’s passage and has now declined for only one year.

With the housing bust, property tax revenues declined, to the consternation of Prop 13 critics. They believe that as houses have been immensely discounted, they will now change hands and be capped in their reassessed value, meaning that “even after the economy recovers, state and local government budgets will not recover fully,” as Jean Ross of the California Budget Project wrote. But this presupposed that real estate will reenter a bull market and continue to climb. It has hardly done so. And given that government has been growing faster than the economy, couldn’t it be time for that trend to reverse?

Moreover, how much money are we really talking about? The San Francisco Chronicle lamented that declining property taxes means a $1.5 billion cut in education spending. That sounds like a lot, but given the huge changes in the housing market and the size of the budget, $1.5 billion is almost rounding error—smaller than the disparity between the true budget shortfall and the shortfall finally closed after months of heated debate.

While California rakes in about 20 billion yearly in property revenue, it is one of the highest taxed states in America overall. The problem is too much spending, not that taxes are too low.

The article I linked to mentions spending cuts without saying what spending would be cut, but also specifically mentions higher income tax rates and a higher sales tax rate as ways to address the cuts. Comparing California’s budget with Florida’s, where taxes have not been increased, shows that California’s problem is not too little revenue coming in, but too much spending.

Over the long haul, higher taxes in California will just chase California taxpayers to other states — like Florida. California is already a high-tax state, and even higher taxes will further hurt California’s long-term economic prospects.

• Peter G. Klein, Research Fellow, The Independent Institute; Associate Professor of Applied Social Sciences and Director, McQuinn Center for Entrepreneurial Leadership, University of Missouri (Austrian)
• James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Government/Business Relations and Professor of Government, University of Texas (Keynesian)
• Jeffrey M. Herbener, Professor of Economics, Grove City College (Austrian)
• Alice M. Rivlin, Senior Fellow, Economic Studies, Brookings Institution (Keynesian)
• John B. Taylor, George P. Shultz Senior Fellow in Economics, Hoover Institution; Raymond Professor of Economics, Stanford University (monetarist)

Here is Dr. Klein’s written testimony, “Federal Reserve Folly and the Great Recession,” and the full panel can viewed below:

For further information on the harmful effects of central banking, including the Federal Reserve, please see the following:

Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity, by Robert Higgs

Financing Failure: A Century of Bailouts, by Vern P. McKinley

Money and the Nation State: The Financial Revolution, Government and the World Monetary System, edited by Kevin Dowd and Richard H. Timberlake, Jr.

"This book is essential reading for those wishing to understand water markets and advance more sensible public policies." —LEE J. ALSTON, University of Colorado

Water shortages and poor water quality are looming threats in many developing countries. By contrast, water supplies and water quality have increased in much of the United States due to a specific policy innovation: water markets and market-like exchanges. The growing participation of wildlife agencies and conservationists in water markets and exchanges is especially fascinating, considering that many hardcore environmentalists disdain markets. This trend is examined in detail in the new Independent Institute book, Aquanomics: Water Markets and the Environment, edited by B. Delworth Gardner and Randy T. Simmons.

How big a deal are water markets for wildlife agencies and conservationists? From 1987 to 2007, more than 2,500 transactions involving so-called “instream rights” were completed in Arizona, Colorado, Idaho, Nevada, Oregon, and Wyoming, with total expenditures exceeding $530 million. Clearly, these groups see benefits to buying rights to ensure water flows that support healthy ecosystems. And yet although these trends are encouraging, the contributors to Aquanomics explain that water markets face serious challenges: changes to federal and state laws, the expanding public-trust doctrine in the courts, and the assertions of new stakeholder rights—these are weakening the enforcement of contracts and property rights in water. For water markets to live up to their full potential, more regulators and conservationists must learn how a market-based system of water rights can reduce waste and pollution, and enhance water flow, water quality, and ecosystem management.

Aquanomics also examines other emerging topics in water policy, such as dam removal. It offers a framework to rationally evaluate proposals to decommission the estimated 79,000 dams in the United States deemed to pose “high” or “significant” risks in the event of failure. It also offers several valuable lessons regarding California water issues, such as the conflict over the Sacramento–San Joaquin River Delta and the encouraging history of groundwater management in the Los Angeles Basin; these are lessons applicable outside the Golden State.

Aquanomics offers both descriptive and prescriptive analyses that support the case for water markets and property rights. Filled with fresh insights, it will quench the thirst of readers interested in the world’s most vital natural resource.

Purchase Aquanomics: Water Markets and the Environment, edited by B. Delworth Gardner and Randy T. Simmons

Read the book summary.

[This post first appeared in the May 8, 2012, issue of The Lighthouse, the Independent Institute's weekly newsletter. To receive The Lighthouse and other email notices from the Independent Institute, enter your email address here.]

Sure enough, we now learn that underwear bomber #2 was a Yemeni double agent, most likely working for the CIA. How many times must we repeat this little bit of political theater before the public wises up?

A Type-1 diabetic teen’s insulin pump was broken by a TSA scanner, despite her showing a TSA agent her pump and providing her doctor’s documentation that she not be put through the screening machine:

Having thus caused her $10,000 pump to cease operating properly, TSA agents compounded their total ignorance:

She says TSA agents then made the situation worse when they didn’t know what to do about her juice and insulin. “She said, because we don’t have the machines to scan the juice to make sure this is not an explosive we do have to do a full body pat down and search your through your bags.” Of course, that’s what she wanted in the first place, but it was too late.

Because so many great pieces about Hayek’s life and work have been written over the years (see, for example, this brief eulogy written by late Julian Simon or any of these articles from The Independent Review), I see no need for me to add to them here.

Instead, I thought it more fitting to quote one my favorite paragraphs by him:

We must make the building of a free society once more an intellectual adventure, a deed of courage. What we lack is a liberal Utopia, a programme which seems neither a mere defence of things as they are nor a diluted kind of socialism, but a truly liberal radicalism which does not spare the susceptibilities of the mighty (including the trade unions), which is not too severely practical and which does not confine itself to what appears today as politically possible…. Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this has rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide. Unless we can make the philosophic foundations of a free society once more a living intellectual issue, and its implementation a task which challenges the ingenuity and imagination of our liveliest minds, the prospects of freedom are indeed dark. But if we can regain that belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost.

From Studies in Philosophy, Politics and Economics (1967)